After Bali, what next? (The Parliament Magazine)

Eija-Riitta Korhola MEP explains her long-term passion to see genuine market mechanisms as the driver to reduce harmful emissions.

Geographically, it's not so far from Kyoto to Bali but in climate terms
it has been a long, bumpy road with arguably an ill-chosen vehicle
carrying passengers with too many wildly contrary opinions. Plus the
journey is not finished.

The Kyoto Protocol, aiming at curbing the alarming changes in our global climate, was born in 1997 but its gestation period began with a less than immaculate conception at the first Earth Summit in 1972 – when the main concerns were acid rain destroying our forests, not climate change.

Kyoto targets were always under-ambitious. Even as a kick-off means to an effective programme, the US reluctance to join and the rapidly increasing emissions of the developing countries, particularly China and India, combined to undermine the Kyoto Protocol and subsequent sessions of the Conference of Parties (COP).

Media critics have labelled the Bali COP as "Talks with a Tan" – it's
easier to be a critic than an actor. I have attended the last five COP
sessions and, for me, Bali was effective: A two-year roadmap was
elaborated providing negotiating tracks for all countries to respond to the climate challenge. It is all encompassing, intelligent with a
possibility to set binding reduction targets for all developed
countries. Now, wouldn't that be good for the EU who currently risks
losing global competitiveness as the pacemaker in the emission reduction marathon? Pacemakers rarely win!

The EU's Emissions Trading Scheme (ETS) has been our most important tool in climate policy since 2005. The ETS is a brilliant concept that requires companies to buy allowances to emit CO2 so they are incentivised to reduce emissions. Such allowances may also be traded thus setting the cost of emitting CO2. Industry wanted such a mechanism,but the result has been disappointing, especially for energy intensive industries competing on global markets.

One problem is that the allocation of allowances to promote trading does not depend on the country's reduction measures alone but on past emissions – thus failing to provide the incentive to cut emissions to their minimum.

For the EU, it is politically important to take the lead hoping that the
others will follow. But our unilateral effort reduces our
competitiveness in global markets giving the advantage to the polluter. This is 'carbon leakage': industries will simply move where there is no cost for emitting CO2.

But, a pollution shift is not a pollution cut.

A unilateral EU ETS hits the energy and employment intensive industries hardest. So, the "polluter pays" principle becomes a "polluter wins" or "polluter relocates" policy. The Commission has understood this risk – Commissioner Verheugen said recently:

"We are exporting pollution and importing unemployment,
– isn't that stupid?"

He is right. We must devise a market-based mechanism that caps
emissions, rewards those who cut them, penalises those who don't and keeps our citizens in work. This is the triangular dilemma of energy supply, environmental sensitivity and retaining globally competitive industries that employ our workforce. So what should be changed in the revised EU ETS Directive? According to the preliminary draft there will be some encouraging elements to mitigate carbon leakage:

*         It differentiates between EU industry with no carbon leakage
risk and global industry with high risk of carbon leakage
*         Some energy intensive sectors could get free …get free
allowances if they are exposed to global markets.
*                The Commission may suggest emission allowances for some
'market-exposed, high carbon-leakage risk' imported goods. The export goods of these areas would be compensated with additional allowances. I would welcome this kind of idea if it is forthcoming.
*         There will be a study on the carbon leakage of energy intensive industry sector by the end of 2011. The revision allows linking the EU-ETS with other corresponding systems outside the EU. Though improbable within the timeframe of the third trading period (2013-2020), the EU ETS must be aimed at linking with
compatible trading schemes based on e.g. sectoral targets in other
markets so as to develop a common basis for the carbon market.

Industrial sector specific examinations aimed at defining the
theoretical minimum of emissions for a ton of production would provide a genuine incentive for real emission reductions anywhere in the world as this system would reward those in a given sector with the lowest specific emissions. The emissions trading scheme linked up together with this kind of a BAT-approach (BAT = best available techniques) wouldn't distort the markets nor give a competitive advantage to the polluter.

Already, the International Energy Agency supports this approach and some large energy using sectors such as cement, steel and paper, once the problem to define their energy data has been solved, have taken the lead to prove it can be done. We have little time left in our mandate to do it – certainly no time to indulge in the political dogma that has prevented any real progress in the last 10 years. We must work together in the Parliament, the Commission, the Council and the industry if we are to succeed.

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